General tax considerations on managing working capital

20/10/20

From a tax compliance perspective, tax authorities around the world have been quick to respond to the current crisis mainly through short term alleviating measures such as an extension of tax filing deadlines and deferral of tax payments which has allowed businesses to adjust to new ways of working.

However, organisations should also carefully consider the relief measures embedded in the local legislation from the perspective of managing working capital. For example, changes in accounting policies may be used to accelerate tax deductions and defer revenue recognition (or do the opposite if they are loss making).

Furthermore, the review of transfer pricing policies to re-evaluate inter company transactions and to reflect the current market conditions or the reassessment of existing inter company financing policies and cash pooling arrangements with a view of reducing costs also comprise effective measures of relief.

The Qatar Financial Centre’s (QFC) tax regime offers firms several features to efficiently manage their working capital. The QFC operates a territorial tax system whereby only locally sourced profits are subject to tax. The system also offers concessionary treatments (exemptions or reduced rate) on an election basis, subject to certain requirements based on international tax standards. These incentives combined with the reduced tax base and a mild rate result in a moderate tax burden. A reduction of the costs is generally an important factor for companies’ performance and cash flow management.

The VAT should not affect a company’s profits because it is borne by the end client or consumer. It has a compliance cost, which translates into a reduction in cash flows. Similarly, the time difference between paying the input VAT on purchases and collecting output VAT on sales results in a cash flow gap. This gap may become an issue where the company has a VAT credit, as it needs to submit a refund request, incur additional costs and wait longer to obtain the refund.

The absence of VAT in the State of Qatar is sufficiently important to be highlighted, as it brings savings in time, costs and cash flows. The country has more than 80 effective tax treaties covering most of the trade partners. QFC firms have access to this network, allowing them to benefit from the concessions and guarantees offered by these treaties. The access to these benefits is maintained in coordination with the General Tax Authority.

As the treaty benefits result in reduced tax liabilities, they may be lawfully used to reduce tax costs and improve cash flows. Taxable profits in QFC are based on accounting profits as adjusted for tax purposes. Any accounting principle that is consistent with the International Financial Reporting Standards (IFRS) or other Generally Accepted Accounting Procedures (GAAP) are allowed under QFC tax regulations. It results in a deferred recognition of revenues or accelerated deduction of expenses and will be accepted in the determination of the tax base (so long as there are no explicit restrictions in the tax regulations).

Losses may be carried forward indefinitely in the QFC. It allows to reduce tax liability in subsequent more profitable years. Additionally, QFC entities that are part of a group may transfer losses amongst themselves to reduce the tax liability of profit-making members using the losses incurred by loss-making members.

Please click on the link to reach out and learn more about the taxes in the State of Qatar as well as the Qatar Financial Centre Authority and Business Start Up Qatar.